The Official Blog of Astrab Legal Services LLC

Sorry all…I’ve been extremely busy on multiple fronts for the past few days and just have not had a chance to update the blog. I’m working on ideas for new content and want to continue the small business series, so please stay tuned for updates!

Good Evening! Its been a busy few days, so I’m going to borrow again and post an article that appeared in today’s Wall Street Journal regarding a topic that has generated much interest – the new IRS ruling allowing investors to forgo required mandatory distributions from IRA accounts in 2009. There is much confusion out there, and this article does a pretty good job of touching base on some areas of concern:

A new law that was intended to give retirees and their battered nest eggs some relief is causing aggravation instead.

Owners of individual retirement accounts and 401(k)s who are over age 70½, and those who have inherited such accounts, must withdraw a minimum amount from those accounts each year, based on their life expectancy. In December, lawmakers suspended that requirement for 2009, hoping to give investors a chance for their accounts to rebound after a brutal year in the markets.

Yet that seemingly simple idea — a one-year reprieve from mandatory withdrawals — is giving headaches to investors, financial planners and retirement-plan custodians. Retirees are getting mixed signals from IRA custodians and other retirement-plan administrators about how to go about suspending withdrawals — and whether they’re even allowed to do so. Administrators of 401(k) plans are worried that the participants in their plans may not be allowed to suspend their withdrawals, and say that the Internal Revenue Service and Treasury Department have yet to provide adequate guidance.

A number of IRA custodians are trying to establish procedures, especially for investors who receive automated payments each year from their retirement accounts, that will allow account holders to suspend or trim required minimum withdrawals. But some don’t plan to send letters outlining changes for 401(k) holders until April. In the meantime, some custodians are still mailing checks — even to retirees who may not want them. Other custodians are stopping payments unless account owners ask for the funds.

There is a backstop for retirees: the “60-day rule.” IRA owners can generally roll unwanted withdrawals back into their accounts, as long as they do so within 60 days. To do so, you can simply write a check to the IRA custodian for the same amount you received. You’re allowed to do one rollover per account once every 12 months. Otherwise, the distribution is taxed. It’s not uncommon for people to miss that deadline, and the IRS in recent years has been reluctant to approve requests for extensions.

“It’s all so confusing,” says Connie White, a 73-year-old retiree in Plainfield, Ind. “You have to stay on top of it.” She and her husband Paul, also 73, received a check from an IRA annuity that they had set up to generate automated payments before they thought to call to change the amount.

The Whites sought help in late January from their accountant, Martin James. Three days later, Mr. James got an email from the couple’s IRA custodian, Lansing, Mich.-based Jackson National Life Insurance Co., explaining how customers like the Whites could suspend their payments. With financial advisers’ help, Jackson National is working with customers whose automated payments already went out to return any unwanted withdrawals, says John Koehler, the company’s vice president of retirement and wealth strategies.

“The legislation was not yet signed by the president when we issued a preliminary communication,” ING said. “Once the law was signed, we … concluded that this was the best way to be compliant and serve our customers.”

Security Benefit Corp., based in Topeka, Kan., stopped payments to IRA owners who withdraw only the required minimum each year, but it has continued payments to those who take out larger amounts. “We suspect that those people [who take out more] are probably living off that income, so we are not going to turn those withdrawals off,” says Thomas Granger, sales director to qualified plans at Security Benefit. In January, a “handful” of customers got distributions they had intended to skip this year, he says.

Gloria Guth, a 73-year-old retiree in Coconut Creek, Fla., called her IRA custodian, TIAA-CREF, in early January to see if she could take half the amount normally required. The answer, she says, was “no, or maybe.” Later, when she asked again, she was told she could do so. A TIAA-CREF spokesman says its call center handles 12,000 clients a day, “and we strive for all of those conversations to help enhance our customers’ financial security.”

The rules for 401(k)s and other workplace-sponsored retirement plans can be even murkier. Some 401(k) plans — for the moment, at least — are still requiring participants to make withdrawals. The reason: Plan sponsors have to get the documents governing their plans approved by the federal government, and some fear that allowing any suspension of payments will violate those documents. Others worry that suspending systematic payments will run afoul of their plans’ governing language.

As such, administrators are trying to figure out whether they first have to amend their plan documents, and get those amendments approved by the IRS, before they can suspend withdrawals.

On Friday, the council sent a letter to the IRS and Treasury Department asking for guidance on how plans can suspend distributions and how retirees who already received unwanted payouts can put them back without penalty. (People age 70½ and older who are still working aren’t required to take distributions from their current employer’s retirement plan.)

The good news: The majority of 401(k) distributions don’t go out until later in the year, “so there is time to wait for clarification,” says Terri Hale, a spokeswoman for Principal Financial Group in Des Moines, Iowa, an IRA custodian and 401(k) administrator. (Account owners who have already received payments can roll them into an IRA and possibly back into their 401(k) or other tax-deferred account, as long as they do so within 60 days.) Principal is joining with industry trade groups in asking the Treasury Department to streamline the “administrative burden” involved in suspending retirement-account withdrawals, Ms. Hale says.

Financial planners are urging investors to keep the following points in mind:

Don’t wait to hear from your IRA custodian or 401(k) administrator. If you wish to suspend distributions in 2009, or ensure delivery of payments, contact your plan and ask what steps, if any, are required.

Similarly, ask whether you will need to submit a request in 2010 — after the law authorizing the one-year suspension expires — to get automatic distributions started again. Some companies say they plan to resume distributions; others will require written requests.

If you do suspend retirement-account withdrawals this year, you may want to roll traditional IRA assets into a Roth IRA. Of course, you’ll have to pay income taxes on the amount you convert. But Roth IRAs have no required distributions and generally no tax on future earnings.

Are you the beneficiary of a trust that holds an inherited IRA? If the trust instructs the trustee to pay you only the “required” IRA distribution, you may get nothing this year, says Natalie Choate, an estate-planning attorney at Nutter McClennen & Fish LLP in Boston. If you need the money, see if the trust authorizes the trustee to pay you “additional amounts in the trustee’s discretion.”

If you were supposed to take your first distribution in 2008, and you waited to do so in the three-month grace period that ends April 1, you still have to make the withdrawal (and pay any tax due). But if you turn 70½ in 2009, you’re off the hook for your first-year withdrawal, and would have to make your second-year withdrawal by Dec. 31, 2010.

About This Site

This blog is designed to serve as an adjunct to my primary business web site and an effort to be proactive in bringing information and opinion to not only my clients but to the general web public as well. I plan to address issues related to the law, to financial and business matters, current events and an occasional off-topic post. Enjoy and don’t hesitate to post comments and offer suggestions on blog topics. I can be reached at astrablegal@sbcglobal.net.